News In Focus

European decision allows challenges to legality of austerity measures

22 September 2016

The admissibility of legal action against European institutions by individuals claiming to have been harmed by illegal actions in pursuit of austerity measures has been upheld by the EU Court of Justice, despite its dismissal of actions arising out of the 2013 rescue package for Cypriot banks.

The Court of Justice set aside orders of the lower level General Court dismissing as inadmissible actions by a company and five individuals who had lost deposited money as a result of the package, but decided not to uphold the actions on the merits.

Under the package, agreed between the European Central Bank (ECB), the International Monetary Fund and the European Commission, along with the Cypriot Government, uninsured deposits of over €100,000 were used to recapitalise two Cyprus banks, in return for the country receiving a bailout from the European Stability Mechanism (ESM). Some investors who lost a large amount of money as a result, sued the Commission and the ECB for damages.

It was alleged that the measures adopted constituted a "flagrant breach" of their right to property, contrary to article 17(1) of the Charter of Fundamental Rights of the European Union and article 1 of Protocol 1 to the European Convention on Human Rights. Cyprus had been compelled by the EU institutions to adopt the measures, which were not fully consistent with EU law.

Giving judgment, the court ruled that the fact that the activities entrusted to the Commission and the ECB within the ESM Treaty did not entail any power to make decisions of their own and commit the ESM alone, did not prevent damages from being claimed from the Commission and the ECB on account of their allegedly unlawful conduct in connection with the adoption of a memorandum of understanding on behalf of the ESM, such as that containing the rescue package. The Commission, in its role of "guardian of the Treaties" resulting from article 17(1) of the Treaty on European Union, had to refrain from signing a memorandum of understanding whose consistency with EU law it doubted. The action was therefore admissible.

However, on the merits, the court reaffirmed the rule that the European Union may incur non-contractual liability "only if a number of conditions are fulfilled, namely the unlawfulness of the conduct alleged against the EU institution, the fact of damage, and the existence of a causal link between the conduct of the institution and the damage complained of. The first condition required "a sufficiently serious breach of a rule of law intended to confer rights on individuals".

That had not been satisfied in this case: the adoption of the memorandum of understanding corresponded to an objective of general interest pursued by the EU, namely the objective of ensuring the stability of the banking system of the euro area as a whole; and "In view of [that objective], and having regard to the imminent risk of financial losses to which depositors with the two banks concerned would have been exposed if the latter had failed, such measures do not constitute a disproportionate and intolerable interference impairing the very substance of the appellants’ right to property. Consequently, they cannot be regarded as unjustified restrictions on that right".